The Irish Real Estate Bubble An Emotional Finance Perspective Clare Branigan UCD Paul Ryan UCD and Richard Taffler WBS ERES June 2015 Motivation Irish property bubble and its economywide ID: 771578
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The Irish Real Estate Bubble: An Emotional Finance PerspectiveClare Branigan (UCD), Paul Ryan (UCD) and Richard Taffler (WBS)ERES June, 2015
MotivationIrish property bubble and its economywide ramificationsIrish property bubble second only to Japan in terms of magnitudeContinuing search for explanations (Commission of Inquiry into the Banking Crisis November 2014- ?)Competing hypothesesRational economic man (homo oeconomicus)Behavioural finance (biases and heuristics in decision making leading to sub-optimal decision making)Housing as an emotional asset (emotional finance)
Presentation OutlineOverview of tenets of emotional finance and the Kindleberger and Aliber (2005) model of market bubblesOverview of Irish economic dataOfficial explanations to date Honohan Report (May 2010)Regling and Watson Report (July 2010)Nyberg Report (March 2011)Preliminary Data analysis Next steps
Emotional FinanceCritical role of the unconsciousInvesting results in an emotional attachment and ambivalence (emotional conflict) (Tuckett and Taffler, 2012)Inherent uncertainty in predictability of future outcomes generating powerful feelings of excitement and anxietyDrawing on psychoanalytic understanding of the human mindWish fulfillment and distortion of reality (Auchinloss and Samberg, 2012)feeling what wants to be true rather than what is true
Emotional Finance (cont’d)Psychic reality vs external realityPleasure principle vs reality principle (Freud, 1908)Consequences are splitting, repression, idealisation, denial Results in the emergence of the phantastic object (unconscious wish fullfilment ) Possession leads to unconscious feeling of omnipotence Groupthink and work groups vs basic assumption groups ( Bion , 1952)
Kindleberger and Aliber- 5 Stages of a BubbleStages- Displacement- Boom- Euphoria- Denial- BlameK&A describe rather than explain why!
Graph of House Prices, Price/Income and Price/Rent 1994-2014
Property Lending Vs. GNP (€m) 2000 to 2007
Proportion of Total Bank Lending attributable to Property Lending 2000-2007
Index of Private Irish Debt (2000=100)
Property- related Tax Revenue
Irish Stock Market Indices 2000-2014
Official Reports- Summary FindingsA key word search for “emotion, “fantasy”, “illusion”, “mania”, “panic”, “unconscious” was undertaken with only a total of 11 hits across the three reports being 9 mentions of “mania” in the Nyberg Report and 2 mentions of “panic” in the Honohan Report. There were no mentions of these words in the Regling Report. Official reports only describe and don’t actually ask why!
Summary Findings: Regling ReportRegling Report lay the blame at low interest rate, favourable taxation regime,, breaches of corporate governance and a breakdown in the implementation of risk management processes and only indirectly mentions groupthink on page 41 of the Report:“the response of supervisors to the build- up of macrofinancial risks wain Ireland banking system was the opposite of hands- on or pre-emptive. There was a socio-political context it which it would have taken some courage to seem to prick the Irish property bubble.”
Summary Findings: Honohan ReportBlame for the crisis are attributed to macroeconomic imbalances, governance structures in the banks and Central Bank and a mistaken belief in the “principles- based” approach to regulation on the part of the Central Bank Again only an indirect mention of groupthink on page 16 of the Report:“... an unwillingness on the part of the CBFSAI to take on board sufficiently the real risk of a looming problem… Rocking the boat and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of the central bank in being prepared to “spoil the party and withstand strong adverse public reaction.” (p.16)
Summary Findings: Nyberg ReportBlame is assigned in a similar fashion to the other two reports but interestingly there are 23 mentions of “herding”, 28 mentions of “groupthink” and 4 mentions of the “bandwagon effect” mostly occurring in a 4 page section termed “Herding and Group Think in Financial Markets” (pp. 7-9) and lays the blame at the belief in efficient markets!“ … the Commission frequently found behaviour exhibiting bandwagon effects both between institutions (“herding”) and within them (“groupthink”), reinforced by a widespread international belief in the efficiency of financial markets” (page i)
Significant News Events in the Irish Property Bubble and Consequent National Economic CrisisTable 1 distributed!Matching to K&A Stages of a Bubble- Displacement: January 1994- December 2000- Boom: January 2000- June 2003Euphoria: July 2003- June 2007Denial: July 2007- December 2010Blame: January 2011- December 2012
Significant News Categories Objective is to explore whether the articles published are consistent with K&A modelTable distributed!
Significant News Events : Key FindingsOverallArticles on views are consistently high in all phasesRenovations category also consistentEuphoria phaseDramatic increase in articles on foreign propertiesGreater proportion of articles with positive toneGreater average number of articles per quarterDenial phaseProportion of articles with positive tone declines Average number of articles published per quarter declinesSubstantially less articles on sales transactions consistent with denialEvidence of ambivalence in articles Articles on foreign properties decline but is greater than boom phase! Banks and Politicans categories go up
Significant News Events : Key Findings (cont’d)BlameBanks continue to be negative whilst politicians have been seen to be dealing with the situationBig increase in the negatively towards property developersView on property have turned positive!
Next StepsNews commentary surrounding IMF, OECD reports etc Articles mentioning bubbleArticles adulating property developersCollusion of parties (media, economists, politicians, banks, property developers etc (Group think)Commentary around significant events e.g. Futureshock programme